Correlation Between Petróleo Brasileiro and BP PLC

Can any of the company-specific risk be diversified away by investing in both Petróleo Brasileiro and BP PLC at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Petróleo Brasileiro and BP PLC into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Petrleo Brasileiro SA and BP PLC ADR, you can compare the effects of market volatilities on Petróleo Brasileiro and BP PLC and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Petróleo Brasileiro with a short position of BP PLC. Check out your portfolio center. Please also check ongoing floating volatility patterns of Petróleo Brasileiro and BP PLC.

Diversification Opportunities for Petróleo Brasileiro and BP PLC

0.28

Correlation Coefficient

Petróleo Brasileiro  BP PLC

Modest diversification

The 3 months correlation between Petróleo and BP PLC is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Petrleo Brasileiro SA and BP PLC ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP PLC ADR and Petróleo Brasileiro is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Petrleo Brasileiro SA are associated (or correlated) with BP PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP PLC ADR has no effect on the direction of Petróleo Brasileiro i.e., Petróleo Brasileiro and BP PLC go up and down completely randomly.

Pair Corralation between Petróleo Brasileiro and BP PLC

Assuming the 90 days horizon Petrleo Brasileiro SA is expected to under-perform the BP PLC. But the stock apears to be less risky and, when comparing its historical volatility, Petrleo Brasileiro SA is 1.15 times less risky than BP PLC. The stock trades about -0.19 of its potential returns per unit of risk. The BP PLC ADR is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  3,044  in BP PLC ADR on December 4, 2024 and sell it today you would earn a total of  58.50  from holding BP PLC ADR or generate 1.92% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.24%
Values	Daily Returns

Petrleo Brasileiro SA  vs.  BP PLC ADR

Petróleo Brasileiro

Risk-Adjusted Performance

Very Weak

Over the last 90 days Petrleo Brasileiro SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

BP PLC ADR

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BP PLC ADR are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, BP PLC may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Petróleo Brasileiro and BP PLC

The main advantage of trading using opposite Petróleo Brasileiro and BP PLC positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Petróleo Brasileiro position performs unexpectedly, BP PLC can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in BP PLC will offset losses from the drop in BP PLC's long position.

The idea behind Petrleo Brasileiro SA and BP PLC ADR pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Equity Valuation module to check real value of public entities based on technical and fundamental data.